Billionaire Nick Hanauer Explains How Higher Wages Create Jobs

The following is the prepared testimony that Nick Hanauer delivered before the wage board in New York City on Monday, June 15th, 2015.

I’d like to start with a quote that may be familiar to you:

From our perspective, raising the minimum wage is a job killer…If the minimum wage were increased, there would be price inflation for consumers or we would likely employ fewer people.—Domino’s Pizza CEO David Brandon.

Raising the wage above $5.15 is a “job killer” at Domino’s? According to their 10-K filings, Domino’s and their franchisees currently employ 220,000 people—an increase of more than 70,000 (almost 30%) since 2004.

“When wages go up, employment goes down.” This so-called “theory” is presented by industry and the economists we employ, as if it is an immutable law of physics describing the real world. The focus of my testimony this morning is to show that it is not.
It’s not just that this claim isn’t always true. Or that it isn’t even usually true. It’s more or less never true. The claim that when wages rise, employment shrinks does not describe how the real world works. It is a scam and an intimidation tactic. The only thing true about this claim is that if business owners like me can get workers to believe it is true, that will be very advantageous to business owners like me. Which is why we say it again and again and again, even though it’s not true. It is really just a polite way of saying “I am rich, you are poor. I prefer to keep it that way.” Saying that if wages go up, the economic sky will fall is what I call “Chicken Little Economics.”

According to the U.S. Department of Labor, “a review of 64 studies on minimum wage increases found no discernible effect on employment.” And contrary to popular belief, relatively large minimum-wage hikes like those recently passed in Seattle, San Francisco, and Los Angeles are not unprecedented. For example, the federal minimum wage jumped 88% in one year, from 40 cents an hour in 1949 to 75 cents in 1950. Yet despite the usual warning from the Chicken Littles at the National Association of Manufacturing that the hike would prove “a reckless jolt to the economic system,” unemployment plummeted, from 5.9% in 1949 to 2.9% in 1953.

Likewise, my home state of Washington raised the minimum wage for tipped workers by 85% between 1988 and 1990—yet over the following decade restaurant employment growth somehow managed to outpace the nation as a whole.

I live in Seattle, the first major city in the US to enact a $15 minimum wage. But a high minimum wage was not a departure for us or something new. Seattle already had the highest minimum wage in the country. Rather, $15 was a continuation of an economic strategy that already was allowing our city to outperform yours.

Our current state minimum wage is $9.47—30% higher than the federal minimum. Seattle’s minimum wage is now $11.00 , 52% higher than the national minimum. But we have no tip penalty in our state, so our tipped workers make $11 plus tips, 513% higher than the federal tipped minimum of $2.13, and more than twice the $5 still paid here in NY.

So, if the good people from the industry were right, that a higher minimum wage killed jobs, then we should have no restaurants in Seattle, right? You would have to bring food and cooking equipment when you came to visit us in the hinterlands. How could it not be otherwise, with these stratospherically high wages?

But here’s a really odd thing. Not only do we still have some restaurants in Seattle, we have a lot of them. In fact, we have more of them per capita than even—wait for it—New York City. According to a Bloomberg analysis, of all major cities in the US, Seattle ranks second in restaurants per capita. New York is number four. Read it and weep, New York. OK, so surely the number one spot will be held by some low-wage paradise, right? Not hardly. The number one spot is San Francisco, the only place in America that pays restaurant workers $12.25, even more than Seattle. Why? How can this be? They told us that high wages killed jobs!! And business! And the economy!

Nonsense.

Seattle has more restaurants than New York because that’s how capitalism works. The fundamental law of capitalism is: when workers have more money, businesses have more customers, and need to hire more workers. In places where wages are high, business is good—particularly for restaurants.

Let me say that another way. When restaurants pay restaurant workers enough so that even they can afford to eat in restaurants, that isn’t bad for the restaurant business—it’s great for it, despite what the good folks at the National Restaurant Association may tell you.

With the highest minimum wage in the country, my state somehow manages to outpace the rest of the country in small business job growth.

According to Paychex IHS Small Business Job Index, Washington, after leading for most of the last two years, is still number two in small business job creation. Why? Because a person earning $7.25 an hour, or $2.13 plus tips, isn’t eating in restaurants. Or visiting the hair salon. Or taking piano lessons. Or sending mom flowers on Mother’s Day.

So why the disconnect? Why do so many people—good people—claim that when wages go up it will be bad for employment and the economy? And yet, it never is. The answer is simple.

From the point of view of the individual business owner, paying workers more is bad. Paying them less is good. But only from the point of view of the individual business owner—which is as far as most business owners think.

Here’s how that thinking goes. I’ll run my business and pay poverty wages and make high profits. And hopefully, everyone else who runs a businesses will pay their workers well. Your workers have the money to buy what my company makes. But, sadly, my workers will not be able to reciprocate and buy the products your company makes. Your workers will pay taxes. Sadly, my workers won’t be able to afford taxes. In fact, they will need taxpayer-funded services like food stamps and Medicaid that your workers’ taxes will pay for.

So I ask you: who wouldn’t want that deal? But the problem with that deal is that it is both morally questionable and economically unsustainable. It’s what we call a free rider problem. Because while it is awesome if I can get you to go along with that deal, it won’t work out if everyone gets that deal. Because if every company owner paid every worker poverty wages, then who will buy the stuff? And who will pay the taxes?

All human endeavors depend on solving obvious collective action problems. Should we put our own fires out? Or should we have a fire department? Should we hack our way through the forest to visit and trade? Or should we build roads? Should only some businesses pay workers enough to support themselves without tax payer assistance? Or should all businesses be required to do so?

It’s pretty obvious to me that the latter is the only answer. And it’s also really obvious why business people and industries who currently have this incredible deal—they pay poverty wages, while being supported by businesses who pay decent wages—want to keep that deal. Who wouldn’t? But wake up, New York. That is what is going on here. That is what is going on every place industry objects to paying workers fair wages. And it always has.

Raising wages for fast food workers won’t reduce employment or harm business. The people saying it will are simply trying to scare you and intimidate their workers. In fact, paying your fast food workers decent wages will be great for those workers, great for business and great for New York’s taxpayers too. And it may finally give you New Yorkers a shot at having a restaurant industry as robust as the one we enjoy in the hinterlands like Seattle and San Francisco.